Accounting and Business Chapter 1 Accounting and Business

What are the Basic Functions of Business? Marketing Human resources Production and operations Finance Accounting and information systems

How do the Functions Use Accounting Information? Marketing Pricing, distribution costs Human resources Pay and fringe benefits, hiring costs Production and operations Production costs—actual and budgeted Finance Cost of borrowing, benefits expected from using the money

How has Business Evolved? Sole proprietorship One owner Partnership Two or more owners Corporation Many owners Merchandising Buy and sell products Service Provide service Manufacturing Make and sell products

How has Accounting Evolved? Determination of wealth What am I worth today Determination of income How has my wealth changed On-going success How is the business doing

What are the Characteristics of Business Today? Customer-focused operations Global markets Advanced manufacturing and communications eBusiness Hybrid organizational structures

What are the Basic Concepts of Accounting? Business entity Keep business and personal records separate Monetary unit Maintain business records in currency Going concern Business will continue past the current period Periodicity Profits/losses must be determined periodically

What are the 5 Basic Elements of Accounting? Asset Right to use resources with future benefit Liability Obligation to transfer resources in the future to suppliers of goods and services Owners’ equity Net assets belong to owners

5 Basic Elements Continued Revenues (accrual basis) Amounts earned from providing goods and services Expenses (accrual basis) Amounts incurred in an attempt to generate revenues

What is GAAP? Generally accepted accounting principles Financial Accounting Standards Board Current rule-making body Pronouncements – Statements of Financial Accounting Standards Statements of Financial Accounting Concepts

What are the Concepts Statements? Useful information for decision making Concepts Statement #2 Characteristics of accounting information (benefits>costs; materiality, understandability, usefulness) Concepts Statement #3 (superceded) Concepts Statement #4 Objectives for non-business organizations

Concepts Continued Concepts Statement #5 Concepts Statement #6 What information should be presented in financial statements and when that information should be presented Concepts Statement #6 Elements of financial statements Concepts Statement #7 Estimating value of future cash flows

What Makes Information Useful? Relevance Capable of making a difference in a decision Reliability Dependable Benefits > Costs Benefits derived must be greater than cost Materiality Large enough to have an impact on a decision

What are the 4 Basic Financial Statements and Auditors’ Report? Income statement Indicates revenues less expenses = net income for a period of time Statement of cash flows Indicates cash inflows and outflows from operating, investing, and financing activities for a period of time Statement of owners’ equity Indicates changes in owners’ equity for a period of time

Financial Statements Continued Balance sheet Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time Auditor’s report Indicates whether the company followed GAAP when preparing its financial statements

What are the Purposes of the Ratios? Current ratio Relationship between current assets and current liabilities Debt to equity ratio Relationship between liabilities and owners’ equity; measure of company solvency (ability to pay both short- and long-term obligations) Return on sales Relationship between net income and sales; measure of profitability (ability to generate profit from sales)

Lecture Examples A company provided $120,000 of services during the year. They received $100,000 from customers. The company’s employees earned $70,000 in wages, but due to the way payroll is determined (monthly), the employees were only paid $55,000. What is the cash-basis income? What is the accrual-basis income? Answer: Cash basis income: Accrual basis income:

Lecture Examples 2. Describe each of the following items and determine which financial statement it appears on. Accounts payable, $136 Building, $809 Accounts receivable, $876 Patent, $2 Cash received from customers, $13,074 Long-term bank loan, $716 Cash paid for inventory, $8,338 Common stock, $3,827 Cash paid to employees, $1,724 Retained earnings, $373 Cost of goods sold, $8,192 Cash balance, $2,211 Inventory, $908 Miscellaneous payables, $529 Miscellaneous operating expenses, $3,686 Sales, $13,353 Wage expense, $1,750

Lecture Examples 3. Using the amounts shown in Lecture Example #2, calculate the current ratio, the debt to equity ratio, and the return on sales ratio. Answer: Current ratio: Debt to equity ratio: Return on sales ratio: